Securities Regulation Daily House FSC announces bipartisan capital formation package with crypto and banking provisions
Monday, July 16, 2018

House FSC announces bipartisan capital formation package with crypto and banking provisions

By Mark S. Nelson, J.D.

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) and Ranking Member Maxine Waters (D-Calif) announced that the House will soon vote on a package of 32 securities and banking bills aimed at making it easier for smaller companies to raise capital. Technically, the package is being added as an amendment to a Senate bill that passed the Senate by unanimous consent in September 2017, so the House version will have to go back to the Senate for further action. The specific vehicle for the House package is a Senate bill that once contained the Securities Act Rule 701(e) amendment for compensation benefit plans that was part of S. 2155 and has already become law. A vote by the full House on the JOBS and Investor Confidence Act of 2018 (S. 488) is expected this week.

Capital formation, crowdfunding and IPOs. The JOBS and Investor Confidence Act contains numerous capital formation provisions. For one, Title I of the bill, the Helping Angels Lead Our Startups (HALOS) Act, would make it easier to conduct demo days. The Jumpstart Our Business Startups (JOBS) Act lifted the ban on general solicitation in some Regulation D Rule 506 offerings, but the HALOS Act seeks to push the SEC to adopt an amendment to the current ban on general solicitation in other offerings conducted under Regulation D Rule 502(c) that may apply to certain events commonly attended by issuers seeking to raise capital. Specifically, the Commission would have to provide that "demo days" events sponsored by, among others, angel investor groups, enjoy an exception from the ban on general solicitation.

Other provisions in the JOBS and Investor Confidence Act would expand the ability to test-the-waters in advance of an offering (Title IX) and revise the crowdfunding provisions to allow for crowdfunding vehicles and the registration of crowdfunding vehicle advisers (Title XXXII). Another provision (Title V) would create an exemption from Sarbanes-Oxley Act Section 404(b) for low revenue issuers.

Broker-dealers. Title III of JOBS and Investor Confidence Act would amend Exchange Act Section 15(a), which makes it unlawful to act as a broker or dealer without being registered with the Commission, to provide for mergers and acquisition brokers. Under the Exchange Act, "broker" means someone who is in the business of effecting securities transactions for others; "dealer" means someone whose business is the buying and selling of securities for their own account through a broker or otherwise. The bill would graft a new exemption onto Exchange Act Section 15(b) to provide for an exemption for M&A brokers from these registration requirements, provided certain criteria are met.

Insiders and 10b5-1 plans. The House package (Title XXVII) also includes the Promoting Transparent Standards for Corporate Insiders Act (H.R. 6320), sponsored by Ranking Member Maxine Waters (D-Calif), which would require the SEC to study the current state of Rule 10b5-1 trading plans and assess whether to limit trading during issuer-adopted trading windows, to curb the use of multiple or overlapping trading plans, to mandate a delay between adoption of a trading plan and the first executed trade under the plan, to restrict an insider’s ability to modify or cancel a trading plan, to require companies and insiders to make certain filings with the Commission, and to mandate that company boards adopt relevant policies and monitor for compliance. The study also must consider factors such as whether revisions to Rule 10b5-1 would change a company’s desire to be public, impact capital formation, or affect the ability to recruit executives.

Exchanges. Under Title XX of the JOBS and Investor Confidence Act, the Commission could register venture exchanges that trade venture securities. These securities would trade only on venture exchanges and would be subject to a public float threshold, although venture securities that exceed the threshold would not immediately cease to be venture securities.

Title VIII of the JOBS and Investor Confidence Act would require the Commission to clarify the meaning of "facility" as the term is used in Section 3(a)(1) of the Exchange Act. The Commission has previously provided additional clarity about other terms of art used in this part of the Exchange Act (See, Exchange Act Rule 3b-16).

Accredited investors. Title X of the JOBS and Investor Confidence Act would treat family office or a family client of a family office as accredited investors under Securities Act Regulation D if certain requirements are met. Title IV of the bill would likewise expand the definition of accredited investor to certain licensed individuals and to individuals with demonstrable education or job experience if these persons have professional knowledge of the subject matter of an investment.

Virtual currencies and trafficking. The JOBS and Investor Confidence Act would continue a recent Congressional trend of targeting crimes of sexual violence and human trafficking through regulation, although the relevant provision, unlike similar securities law provisions for conflict minerals, would be housed in non-securities statutes. Title VI of the bill would mandate additional coordination and monitoring by federal regulators regarding human trafficking under the Victims of Trafficking and Violence Protection Act of 2000. Title XXIII of the bill would require a GAO study of the role played by virtual currencies in enabling sex and drug trafficking. The preamble to the provision notes that virtual currencies are a "prominent" payment method with respect to illegal sex and drug trafficking.

Moreover, Title XVI of the JOBS and Investor Confidence Act would direct the president and federal law enforcement agencies to develop a national strategy to combat the financial networks of transnational organized criminals.

Banking provisions. The JOBS and Investor Confidence Act contains banking provisions that span multiple titles and generally function as a further easing of banking regulations in addition to the recent relaxation of Dodd-Frank Act mandates enacted via the Economic Growth, Regulatory Relief, and Consumer Protection Act. Title XV of the JOBS and Investor Confidence Act, for example, would allow the SEC and the CFTC to adopt regulations for financial companies for which they are the primary financial regulatory agency, requiring these companies to conduct periodic analysis of their financial condition, including their liquidity under adverse economic conditions. Title XII of the bill would provide for updates to living wills every two years instead of periodically.

Under Title II of the bill, the Fair Credit Reporting Act would be amended to allow for increased reporting of consumers’ positive credit history which, according to the authors of the underlying legislation, could allow consumers to obtain more stable and affordable credit. Title XIX of the bill would grant banks a safe harbor when they keep open certain accounts at the request of law enforcement.

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